Accounting for Merchandising Concern

INTRODUCTION
Accounting concepts for a service business are applicable for merchandising business but some additional accounts, schedules and computation are needed to record its sales and purchases (accounting for inventories)

TYPES OF MERCHANDISERS A wholesaler is one who buys in bulk from a manufacturer and sells to a retailer who in turn sells to ultimate consumers or customers

SERVICE CONCERN VERSUS MERCHANDISING CONCERN

* Excluding income taxes

Major Income Statement Accounts

Sales comes from selling goods and merchandise Merchandise represents the stock of goods or items brought by the merchandiser for resale to its customers (also called merchandise inventory) Cost of Sales is a major expense account of a merchandiser which represents the cost of buying the merchandise which were sold to obtain revenue Gross Profit is the mark-up or margin of profit in selling the goods to the customers

INVENTORIES
DEFINITION Assets which are held for sale in the ordinary course of business, in the process of production for such sale or in the form of supplies to be consumed in the production process or in the rendering of services (PAS 2)

Simply stated, these are the stock of goods or items bought by a merchandiser for resale to its customers

INVENTORY SYSTEMS
Periodic calls for the physical counting of goods on hand at the end of the reporting period to determine the quantities. Is generally used when the individual inventory items turn over rapidly and have small peso investment Perpetual requires the maintenance of records called stock cards that usually offer a running (continuous) summary of the inventory inflow and outflow Is commonly used where the inventory items treated individually represent a relatively large peso investment
The periodic system will be illustrated in this discussion

GOODS INCLUDIBLE IN THE INVENTORY As a rule, all goods to which the entity has title shall be included in the inventory, regardless of location WHO IS THE OWNER OF GOODS IN TRANSIT? This will depend on the terms FOB DESTINATION ownership of goods purchased is transferred only upon receipt of the goods by the buyer. Ergo, the seller is the owner of goods in transit FOB SHIPPING POINT ownership of goods is transferred upon shipment of the goods. Ergo, the buyer is the owner of goods in transit.

FREIGHT TERMS
Freight collect freight charge on the goods shipped is not yet paid. Thus, under this, the freight charge is actually paid by the buyer. Freight prepaid this means that the freight charge on the goods shipped is actually paid by the seller. NB: The terms FOB Destination and FOB Shipping point determine the ownership of the goods in transit and the party who is supposed to pay the freight charge.

(AFI) PURCHASES
Total Cost of Goods Delivered sum of Purchases and Freight-in (Transportation In) Purchases account title used whenever merchandise is bought for resale It represents an owners equity account for goods available for sale by the business (IS Account) Freight-in cost of delivery of the merchandise sold. (applicable only if the shipping terms in FOB Shipping Point)

(AFI) PURCHASES ILLUSTRATION

Ronald David, the proprietor of AI Bookstore bought on account, P50,000 worth of books to be transported by a boat at a cost of P1,000 under the terms FOB Shipping Point, Freight Collect. The goods were received on August 5 and the freight was paid accordingly The entries to record the transaction would be:

(AFI) PURCHASES ILLUSTRATION

Supposed the term is FOB Shipping Point Freight Prepaid? The journal entry would be:

PURCHASE RETURN AND ALLOWANCES

Goods bought may be returned to the seller for being defective, spoiled or not as ordered. Or instead of returning these, buyer may just request a reduction in the price. PURCHASE RETURN is the account to be credited every time a merchandise is returned to the seller. PURCHASE ALLOWANCE is the account to be credited when a seller agrees to a reduction of the buyers liability to the former.
NB: For convenience purposes, companys usually maintain only one account, Purchase Returns and Allowances. This is a contra account deducted to Gross Purchases (together with Purchase Discounts) to arrive at the Net Cost of Purchases

(AFI) PURCHASE RETURNS AN ALLOWANCES ILLUSTRATION

Using the preceding illustration assume that when the P50,000 goods bought on account were received, P5,000 were found defective and were returned on August 7. The journal entry would be:

TRADE DISCOUNTS
Trade discounts are deductions from the list or catalog price in order to arrive at the invoice price which is the amount actually charged to the buyer. Thus, trade discounts are not recorded. Chain discount series of percentage reduction to the list price/catalog price.

To illustrate, assume that the list price of 100 pair of shoes is P500,000. Terms: Less 10-5-2. Determine the Invoice price:
List price 1st Trade discount (500,000*.1) 2nd Trade discount (500,000*.9*.05) 3rd Trade discount (500,000*.9*.95*.02) P500,000 (50,000) (22,500) ( 8,500)

Invoice Price

P418,950

CASH DISCOUNTS
Cash discounts are deductions from the invoice price when payment is made within the discount period. The purpose of cash discount is to encourage prompt payment.

Cash discounts are recorded as purchase discount by the buyer and sales discount by the seller. A discount (pov of buyer) is recorded by debiting the liability and crediting the contra purchases account called Purchase Discount. The usual credit terms are: n/30 (account is payable within 30 days) 2/10, n/30 (the account is payable within 30 days with a 2% discount given if paid within 10days from the date of sale) 3/EOM, n/60 days (account is payable within 60 days with a 3% discount if paid at the end of the month on the date of sale)

(AFI) PURCHASE DISCOUNT ILLUSTRATION

On May 1 Calungsod of Cebu bought goods to Marikina Shoe Factory for P20,000. A 2% trade discount was granted and the term of purchase was 2/15, n/30, FOB Shipping Point, Freight Collect. Calungsod paid the freight amounting to P1,000 upon receipt of the shipment and paid the account on May 15 by issuing checks on the said dates.

(AFI) PURCHASE DISCOUNT ILLUSTRATION (continued)

Suppose on the preceding illustration the term is FOB Shipping Point, Freight Prepaid. The entries will appear thus:

NET COST OF PURCHASES

Formula

COST OF SALES

represents cost of merchandise given to the customer for the sales revenue received. under the periodic method, cost of sales as well as merchandise inventory balance are determined only at the end of the reporting period based on an inventory count. Formula

REVENUE ACCOUNT OF MERCHANDISERS

SALES - is earned when the merchandiser or seller of the goods transfers the merchandise to the customer. Supported by a source document called Invoice.

SALES DISCOUNT is a contra revenue account which is the cash discount on the point of view of the seller
SALES RETURNS AND ALLOWANCES contra revenue account used when the buyer returns merchandise due to wrong specifications or damage goods or when the seller grants allowance in price for the goods purchased. FREIGHT OUT cost to the seller of transporting the goods to the buyer. (Appicable only if the shipping term is FOB Destination)

(AFI) REVENUE TRANSACTIONS

Assume that on March 1 AI Bookstore sold goods to Ronald David for P6,000 with a P2,000 down payment and balance on term 2/10, n/30 FOB Destination, Freight Prepaid. On March 8 the customer paid P1,000 and returned defective goods amounting to P1,000 and the balance was paid on March 10. Freight cost amounted to P1,000 and was paid by means of check.

(AFI) REVENUE TRANSACTIONS

(AFI) REVENUE TRANSACTIONS

Supposed that the term was P2,000 down, balance 2/10, n/30 FOB Destination, Freight Collect? The entries will be?

NET SALES
At the end of the reporting period, several accounts are deducted from gross sales to arrive at the net sales revenue. Formula:

VALUE-ADDED TAX
Is a tax levied by the government to both buyers and sellers. Increases the amount to be paid by the buyer but it should not increase the cost of purchase. INPUT TAX is the account to be debited for the VAT portion every purchase. (Buyer debits) Increases the amount to be collected by the seller but it should not increase the revenue. OUTPUT TAX is the account to be credited for the VAT portion every sale. (Seller credits) INPUT TAX and OUTPUT TAX are closed against each other. If OUTPUT TAX > INPUT TAX, the balancing figure is VAT PAYABLE (credit) If INPUT TAX > OUTPUT TAX, the balancing figure is PREPAID VAT (debit)

(AFI) PURCHASE AND SALE TRANSACTIONS WITH VAT

On July 1 Calungsod bought goods from Marikina Shoe Exchange on account P100,000 plus 12% VAT terms, 2/10, n/30. On July 10 Calungsod sold the goods to cash customers for P150,000 plus a 12% VAT. Calungsod issued check to pay the amount owed to Markina Shoe exchange on July 11.

(AFI) PURCHASE AND SALE TRANSACTIONS WITH VAT